As business environments shift in response to COVID-19, companies are managing employees remotely. Working from home (WFH) has become the “new normal” for a lot of organizations, as we all do our part to keep our communities healthy.
Crowe MacKay’s tax team suspects the next question that is on everyone’s mind is - what are the tax implications of working from home? How does having your employees work from home impact you as an employer as well as them from a tax standpoint? Here’s how you can begin to navigate this as it relates to your 2020 taxes.
Can Employees Claim Home Office Expenses Against Their Taxes?
As the rules stand currently, to be entitled to deduct home-office expenses, an employee must be “required by the contract of employment” to maintain such an office. The space must also be either:
(a) where the employee “principally” (more than 50% of the time) performs their duties of employment
(b) used exclusively to earn employment income and on a regular and continuous basis for meeting clients, customers, or other people in the course of employment duties.
With new working climates induced by COVID-19, these rules are being tested by tax specialists, and as a result questioned.
I. Contractual Requirement
Unless any organization had a crystal ball, most employment contracts may be silent on this matter currently. This requirement does not always mandate a written contractual requirement but an implied agreement may also suffice. Perhaps requiring employees to work from home as required by government regulations in light of COVID-19 may serve as an implied contractual requirement. However, to substantiate the contractual aspect of the arrangement, employers are still required to issue form T2200 to each employee in support of these claims. If abiding by the current rule, companies would be required to complete the form for each employee, creating a significant administrative strain within their organization. The Canadian Tax Foundation in conjunction with CPA Canada approached the government to ask whether a streamlined approach could be used in lieu of completing the form T2200 evidencing that the employees were required to work from home during the pandemic. No response has been received to date.
II. Principal Place of Employment
The Canada Revenue Agency (CRA) typically defines “principally” as working more than 50% of the time from home. However, it is unclear if the threshold needs to be looked at over the course of a full year or part of a year. If being considered over a full calendar year, then this would imply that for a 12-month period of employment, the WFH policy would have to be in place for at least six months in order to meet the test. An exception could be seasonal or project oriented businesses (where hours expected on employment contract fluctuate during the year), where the 50% requirement could be met sooner. Given the pandemic related restrictions of working from home may not last up to six months for most businesses, looking at some alternative interpretations are worth contemplating.
III. Meeting Customers Regularly
The CRA has previously opined that a “meeting” is defined as a physical encounter. Physical distancing requirements recommended by governments seem to make this test impossible to meet in the current climate. It is yet to be determined whether online virtual meetings and conference calls can cause an employee’s home office to be viewed as a place where that employee regularly meets customers. In the past, the CRA has taken the position that video and conference calls do not count as meetings. In light of how the current pandemic is causing the location of work to rapidly change, it is possible that soon Tax Courts will have to reassess this matter.
Tax Implications to Consider
Provided the conditions contemplated above can be met, employees can generally claim only some expenses as deductions against their employment income. Expenses need to be allocated to home office space on a reasonable basis, typically based on area. In reviewing the rules on deduction it is evident that they are skewed against home owners.
|Utilities (electricity, heating)||Property taxes*|
|Supplies (stationary, paper, etc.)||Capital expenses (purchases of assets like computer, chair, desk, etc.)|
*unless earning commission income.
Allowance/Reimbursement from Employer
When setting up employees to work from home, employers need to consider how they want to provide employees with the required equipment to fulfill their roles. Common options used to do this include providing employees with an allowance or reimbursement towards the purchase or upgrade their equipment.
In normal circumstances, an allowance or reimbursement to facilitate teleworking would be considered a taxable benefit. However, given the current COVID-19 pandemic, the CRA would treat reimbursement of up to $500 towards the cost of personal computing equipment to enable teleworking as a non-taxable benefit subject to receipt.
Strategy to Consider
We have outlined steps that your organization may consider as you create a strategy to address the tax aspects of working from home for your employees.
i. Create a WFH policy for your employees which covers:
- Advising employees that expenses should only be incurred that relate to earning employment income.
- Documenting the requirement of WFH in writing.
- Creating WFH terms and conditions such as defining the home workspace as the location where an employee mainly works from.
- Outlining that it is the employees’ responsibility to retain support of claims being made.
ii. Have resources available to employees including FAQs and tax related information for employees to consider if given the option to WFH.
iii. Continue to monitor the CRA for updates.
iv. Consider buying the equipment directly for your employees rather than giving them an allowance or reimbursing them for their expenses. Incorporate a requirement to return the equipment upon the termination of employment.
v. Consider whether you would bear the additional tax cost for your employees if a benefit is considered taxable.
While it may be hard to already start thinking about 2020 tax matters amidst all the uncertainty caused by the pandemic, addressing the tax impact of WFH now will reduce the stress next year. As the CRA continues to navigate COVID-19, employers should be frequently checking with the CRA and any new announcements they release in regards to WFH.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.